CentralandEasternEuropeLegalNewsandViews

Piercing the Corporate Veil in Poland – Is This Possible?

One of the many questions asked by our clients is: “Does Polish law recognise the concept of ‘piercing the corporate veil?’” Is it possible to disregard the separate legal personality of a company or corporation and make shareholders liable for the debts of the company? This question has been asked since the introduction of the market economy in Poland (in 1989) and there is still no clear answer.

As a start, it is worth considering a general point – that Polish law is interpreted literally by the wording of the legislation rather than its intention, which, although present in the discussion and practice of law, is applied more readily to EU law (in order to ensure its full application) than to Polish law. Thus, the courts tend to look at the specific wording of law rather than its intended application.

To put this in the context of corporate and commercial law, the Polish law applicable to companies, namely the Code of Commercial Companies, reads “the shareholders shall not be liable for the liabilities of the company”. This is a basic and fundamental principle of operation for the “limited liability company” and “joint-stock company” in Poland. In addition, members of the management board generally bear no liability for company debts. There is, however, one exception in the case of a limited liability company, which is being invoked with increasing frequency. This exception, though, is based on a provision of law rather than any concept of piercing the corporate veil. Therefore, holding shareholders liable for the debts of a company seems impossible. This haunts many plaintiffs in Polish courts, particularly where, for example, they learn that a company’s shareholders have siphoned money out of a company. Where a plaintiff has been dealing with the company, they are often unable to sue the shareholders to recover their losses.

Polish law does recognize the concepts of “abuse of law” and the “circumvention of law”, allowing the courts to deny legal protection and disregard legal actions if such legal actions were made in circumvention of law (i.e. when formally lawful steps are made in order to achieve an illegal goal), or if law is used in such way that it is contrary to the rule of “socio-economic co-existence” (good customs) and, therefore, may not benefit from legal protection. Although these concepts have been known for a long time (and the courts have made good use of them even in commercial cases) the courts are not willing to disregard the separate legal entity of the company on their basis. There is no single answer to why this is the case. One reason may be that the courts simply rely on the provisions of law providing that the shareholders are not liable for the debts of the company. Another, more academic, reason might be that using the company for dealing with third parties may not constitute “abuse of law”, since it is not the exercise of a so-called “subjective right”. To sum up, for a long time, the concept of “piercing the corporate veil” has not been taken into consideration by the Polish courts.

There are, however, certain notable exceptions that may hint at a change in interpretation. The Supreme Court, reviewing certain judgments of the lower instance courts in labour law matters, granted the cassation filed by an employee seeking legal protection, and reversed judgments ordering the lower instance court to review them again, taking into consideration the concept of piercing the corporate veil. In one of its judgments, the Supreme Court mentioned that the fact that a defendant used two separate companies to employ the same employees to perform the same duties, under the direction of the same person, but formally working for two separate employers (separate companies), may constitute abuse of law (namely the laws concerning overtime) and necessitate a review of this part by the lower instance court, which should take into consideration the concept of piercing the corporate veil. Although the Supreme Court did not explain in detail what this may mean in practice, it very clearly allows the concept that using the company as an entity to carry out dealings with the third parties may, in certain circumstances, be treated as abuse of law.

This does not seem to work well in commercial cases, though. There are no known commercial cases where the court has disregarded the separate legal personality of the company. Many articles have been written on this subject and, still, the courts remain unpersuaded by the need to apply this concept.

Further, regardless of the long debate on amendments to the Code of Commercial Companies, with respect to the provisions referring to the relationships between the subsidiary and dominant company and, potentially introducing, in certain cases, the liability of shareholders for the debts of the company, such amendments have not been introduced. The Code provides only for a liability of the dominant company for damages caused to the subsidiary. There are no provisions that may be invoked to disregard the separate legal personality of the companies. Changing this situation would very likely require change of the law repealing one of the fundamental provisions of corporate law, i.e., no liability of the shareholders for the company. It is rather unlikely that the court will change its attitude towards this issue without such a change.

Thus, the answer to the question “is piercing the corporate veil possible in Poland?” is, for commercial cases at least, that it is not possible at this moment or at least very unlikely.

Does this mean that there are no chances to make shareholders liable for the actions of the owned company? Broadly, the shareholder will not be liable for the company’s debts, but may be liable for its own actions caused by their “use” of the company if it is such that third parties have been unlawfully injured. Such unlawful actions may include mismanagement of the company or wilful misuse of the company in order to avoid payment of debts. If such behaviour of the shareholders is an abuse of law or is against the rules of civil law, it may be a civil law tort. If the claimants proved the usual prerequisites of shareholders’ tort liability, the shareholders would be liable – not for the debts of the company but for the damages caused by their own behaviour. There would be no piercing of the corporate veil but the injured parties would have the chance to recover their damages.

Another way to extend the scope of liability for a company’s debt is to challenge the validity of legal deeds made between the company and third parties on the basis of general provisions of the civil law, if a transaction between the company and third party makes the company insolvent (so-called “actio pauliana”). Although, technically, the third party is not liable for company debt, successful actio pauliana allows the creditor to seize the assets (including money) that have already left company coffers. Finally, in case of a limited liability company, creditors under certain circumstances may pursue members of the management board of a company for payment of the company’s debts.

To summarize, there are two contrasting messages – one good and one bad. The bad news is that it is still largely impossible to “pierce the corporate veil” and disregard the separate legal personality of the company in commercial cases. The good news, however, is that there are effective ways around it, which are seemingly becoming increasingly commonplace.

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